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South Korea: Cryptocurrency multi-level marketing

In Korea, in order to carry out multi-level marketing activities, a company must be registered as a 'multi-level marketer' as specified in the Act on Door-to-Door Sales (Act) and fulfil the necessary conditions contained in the Act. In this regard, if a company sells a cryptocurrency issued in an initial coin offering (ICO) to several buyers/investors at multiple levels, it could be regarded as a multi-level marketing organisation as defined in the Act.

Korean regulatory authorities have consistently punished people who conduct multi-level marketing activities, regarding it as conducting a fundraising business without permission, or a violation of the Act.

The definition of multi-level marketing according to the Act is selling goods or services through a sales organisation that meets the following criteria: 1) an organisation has a recruitment scheme under which a salesperson who signed up under a sales business entity solicits individuals to join the organisation as subordinate salespersons of the first salesperson; 2) salespersons belong to the organisation at three or more levels (including cases where the salespersons are classified into two or fewer levels but are actually managed and operated at three or more levels); and, 3) a sales business entity has a scheme to pay bonuses based on transaction performance or outcomes of organisational management.

If we deem the purchase of tokens by buyers as a sales business during the process of issuing a company's recruitment of buyers (investors) in a specific ICO, the recruitment by buyers of additional ICO participants in the same process could be regarded as another sales business. This could possibly lead to three or more levels of business, partially fulfilling the designation of multi-level marketing. In such a case, various obligations would emerge related to the registration of a multi-level marketing business entity, the establishment of consumer protection guidelines, and other prescribed actions as per the Act.

In spite of this, it is still hard to state categorically whether the sales business described above would definitely be deemed a case of multi-level marketing, since a typical ICO does not conform to the abovementioned structure. However, if any recruitment payment is provided to ICO participants during the public sale stage due to sluggish sales, or there exists a bonus scheme under which a primary salesperson who has earned more bonuses grants his or her subordinate salespersons fewer bonuses than he or she originally obtained, this ICO could be regarded as having a multi-level marketing component under the Act.

In this regard, although the Act does not govern ICOs itself, companies who conduct an ICO could be regulated or even punished if their actions match the characteristics of multi-level marketing as defined under the Act, while selling the tokens as part of that ICO.

Precautionary measures can be taken to avoid this situation, by (i) providing a multi-level sales protection clause via a private sales contract or terms and conditions for public sales; (ii) making continuous efforts such as monitoring the situation in order to prevent any type of multi-level marketing activities from occurring and filing evidential materials to support this; or, (iii) operating a surveillance system to uncover the use of intermediate recruitment methods that involve multi-level marketing.

Chan Sik Ahn

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